Deripaska's group bets on improving aluminum, Russian outlook

LONDON (Reuters) - A deepening global shortage of aluminum and an improving outlook for Russian equities should make tycoon Oleg Deripaska’s En+ company attractive to investors seeking exposure to emerging markets free of foreign exchange risks, its chief told Reuters.

Chief Executive Maxim Sokov said En+ is billing itself as a Russian aluminum and hydropower conglomerate similar to Norway’s Norsk Hydro but with the benefit of lower-cost Siberian power, a boon for highly energy-intensive aluminum smelting.

“We convert power into aluminum and sell it to the world. We believe the aluminum market has a significant upside,” said Sokov, whose company owns Siberian power assets and a 48 percent stake in Rusal, the world’s second-largest aluminum producer.

In a Reuters poll published this month, analysts slashed their estimates of a global aluminum surplus this year by 74 percent to 82,000 tonnes from 317,000 tonnes in the previous poll in January. They have pegged in a deficit of 200,000 tonnes for 2018, mostly due to a crackdown in top producer China to reduce smog.

The metal, mainly used in transport and packaging, has been the best performer on the London Metal Exchange, rising 13 percent this year and touching 28-month highs.

En+ predicts demand for aluminum will exceed production by 0.7 million tonnes this year even before China caps winter power generation to reduce pollution.

That should lead to a further decline in aluminum production globally by about 1.2 million tonnes, beginning from the winter months of 2017, Sokov said. En+ is considering an initial public offering (IPO) in 2017, possibly as early as June, market sources have said.

Sokov declined to comment on any IPO, saying the group “is considering various instruments, including public capital markets” to raise funds as it is seeking to cut its debt.

DEBT BURDEN

En+ has amassed debts of around $5 billion during the last decade when it was consolidating power assets in Siberia and wants to reduce the leverage to around three times its core earnings from the current ratio of around six.

Deripaska, who started as a metals trader in the 1990s, was Russia’s richest and the world’s ninth richest person, according to Forbes, before the markets crashed in 2008.

The tycoon spent the next decade successfully renegotiating his debts although he never fully recovered and with an estimated wealth of $5.1 billion he ranks today as Russia’s 23rd richest man.

The debt is mainly with top Russian state banks Sberbank and VTB, of which two thirds is rouble denominated and one third is dollar denominated. Sokov said rouble revenues from power sales support repayment of rouble debts, while Rusal’s dollar-denominated dividend supports dollar debt payments, thus limiting foreign exchange risks which often put off investors in Russian companies.

“We effectively have a natural hedge thanks to aluminum and power generation. If the dollar weakens, we get stronger rouble revenues from power sales. If the rouble weakens, then we gain from higher dollar aluminum revenues,” Sokov said.

Besides an improving outlook for the sector, the outlook for Russia is also getting better as geopolitical and sanctions concerns subside.

“The outlook for Russia will depend on the meeting between (Russian President Vladimir) Putin and (U.S. President Donald) Trump. But even among this uncertainty, Russian assets have considerably gone up in price,” said Sokov.

He gave as an example yields on Russian corporate bonds, which used to trade above 10 percent but have lately declined to 4-6 percent on renewed appetite from investors, including for Rusal’s debt.

“I think a similar story will happen with Russian equities” he said, predicting the narrowing of valuations gaps with Western rivals.